Mutual Funds Face GST Demand on Exit Loads

21 Mar 2024 , 11:26 AM

The Directorate General of Goods and Services Tax Intelligence (DGGI) has recently issued show-cause notices to several mutual fund (MF) companies, aiming to recover a significant sum in goods and service tax (GST) on exit-load charges. An official source disclosed that the amount sought from the MF firms could exceed ₹150 Crore.

Despite the GST department’s “clarification” in 2018 stipulating that GST must be levied at 18% on exit loads, many firms have not complied with this directive. The current wave of notices pertains to over 100 MF schemes, and the tax authorities have already collected at least ₹10 Crore from a few firms that opted to settle the dues.

Among the MFs targeted by the GST notices are Nippon India Mutual Fund, Kotak Mahindra Mutual Fund, and ICICI Prudential Mutual Fund, among others.

Exit load refers to the fee imposed by MF firms when investors redeem or sell their units before the lock-in period expires. This fee acts as a deterrent to impede investors from making premature withdrawals of their investments.

The Central Board of Indirect Taxes and Customs (CBIC) clarified in 2018 that exit loads in mutual funds are subject to GST. However, the industry argues that these charges are not for any service provided to the investor but rather act as a deterrent to discourage early withdrawals. Therefore, they contend that such charges should not be subject to GST.